To determine whether an investment target is viable, merely looking at the price is far from sufficient. A professional trader must also learn to observe "trading volume." By analyzing the trading volume of a commodity, we can gauge the overall market momentum's strength.
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If the trading volume is high, it indicates that the target is receiving significant market attention and has excellent liquidity. If a massive trading volume occurs at the price bottom, there is a higher chance of a short-term price increase.
What is trading volume?
Trading volume is a quantifiable metric that refers to the number of a specific asset traded over a period in financial markets.
Trading volume is a key indicator of market activity and liquidity, and it is typically displayed alongside price information.
As shown in the figure below, the K-line chart represents the daily price trend of the Euro against the US Dollar (EUR/USD), while the green bars indicate the daily trading volume.
What is cryptocurrency trading volume? What is its use in trading?
EUR/USD daily chart source: OANDA
A trade requires both a buyer and a seller to facilitate it, so each transaction is a single trade, and trading volume is formed accordingly.
For example, if there is a seller placing an order to sell 100 contracts of EUR/USD, and there is also a buyer placing an order to buy 100 contracts of EUR/USD, then this trade will be matched by the exchange.
In simple terms, it means that the seller and buyer reach a consensus on the current price of the commodity, and they are willing to place the same quantity of orders at the same price. When both parties' expectations align, the price is finalized, and the number of contracts established is the trading volume.
The relationship between trading volume and price
In technical analysis, the relationship between trading volume and price is considered an important basis for judging the strength of market trends.
By observing the "volume-price relationship," investors can more accurately determine whether the market trend is likely to continue or reverse.
Here are common interpretations of volume-price pairings:
| Technical Pattern | Definition | Interpretation | Application Suggestion |
|---|---|---|---|
| Volume Breakout | Stock price breaks through previous highs or resistance zones, accompanied by a significant increase in trading volume | Bullish initiation, major players entering, potential for a new upward trend | Observe the continuation strength the next day; it can serve as a basis for chasing the rise |
| Volume Contraction | Stock price consolidates within a range, with gradually decreasing trading volume | Market is cautious, positions are settling, possibly preparing for a breakout | Wait for a volume explosion to occur simultaneously with a breakout before entering |
| Price Drop, Volume Drop | Price declines while trading volume also decreases | Selling pressure weakens, market is quiet, possibly nearing a bottom | Observe whether a successful bottom is being formed and whether there are signals of not breaking lower |
| High Volume Long Black | High trading volume accompanied by a long black K-line or limit down | Major players are offloading or panic selling, strong bearish sentiment | Avoid chasing shorts; wait for selling pressure to be digested before observing |
| Historical High Volume & Price | Historical maximum volume coinciding with stock price peaks | May indicate the end of a bullish phase, nearing a reversal zone | Take profits in batches, be wary of reversal signals |
| Low Volume Rise | Price rises slowly but trading volume does not increase | Lack of buying support, the upward trend may be difficult to sustain | Wait for volume confirmation before entering, avoid chasing highs |
Key points for interpretation:
Prices need to be supported by trading volume to sustain movement: If prices rise significantly but volume does not support it, it can easily lead to "volume-less increases," with a higher risk of pullbacks afterward.
Caution with price drops and volume increases: This indicates a lack of market confidence, and selling pressure may come from institutions or major players offloading, making it unwise to enter in the short term.
Volume during sideways movement is both a warning and an opportunity: If there is a sudden increase in volume after a long period of consolidation, it often signals that the market is about to choose a direction.
What is the use of trading volume in trading?
Trading volume refers to the number of a specific asset traded over a period, so when overall market trading activity becomes active, trading volume will inevitably increase.
An increase in trading volume also indicates strong "market momentum," with buyers willing to absorb the selling pressure from sellers, often brewing short-term rebound opportunities.
As shown in the figure below, the K-line chart represents the daily price trend of the Euro against the US Dollar (EUR/USD), while the green bars indicate the daily trading volume, which often spikes on certain trading days after significant price declines.
After a spike in trading volume, short-term rebound opportunities often follow, although the extent of the rebound may vary.
What is cryptocurrency trading volume? What is its use in trading?
EUR/USD daily chart source: OANDA
The investment concept of trading volume applies to stocks, bonds, options, futures, commodities, and forex trading. Therefore, investors in any commodity need to learn to observe changes in trading volume to appropriately adjust their investment strategies.
Trading volume is a popular tool for professional traders when conducting market analysis, as it can provide additional references when studying historical asset prices. Most importantly, it helps to identify turning points in market trends.
It is important to note that forex and CFD trading does not go through exchanges; transactions occur directly between operators and investors, differing from stock markets that operate through securities exchanges. Therefore, trading volume does not represent the overall market and should only be used as a reference.
Precautions when using trading volume
Trading volume is one of the most valuable indicators in technical analysis, but in practice, misinterpretation or failure to consider relevant background factors can lead to errors.
Here are several key points to pay special attention to when using trading volume:
- An increase in trading volume does not necessarily indicate bullish sentiment
While the common belief is "increased volume leads to price increases," an increase in trading volume does not absolutely signify a healthy price rise.
Especially when stock prices are at high levels, if a spike in volume occurs but the price increase is limited, or if a long black K-line forms, it may indicate that the market is experiencing significant profit-taking or that major players are offloading at higher prices. This situation is referred to as "volume stagnation."
Additionally, an increase in volume following positive news may reflect short-term speculative trading and may not possess long-term trend continuity, so caution is advised, and one should not blindly chase highs.
- Abnormal trading volume must be interpreted alongside fundamentals and news
When trading volume spikes abnormally, it cannot be judged solely from a technical perspective.
It is essential to consider whether there are significant news events occurring, such as:
- Earnings reports (especially if earnings are below expectations)
- Ex-dividend dates
- Institutional earnings calls or industry outlook presentations
- Insider or major shareholder transactions
- Market rumors or merger news
These factors may lead to short-term panic or excitement among investors, causing temporary abnormal trading volume.
At this time, it is not advisable to rely solely on technical patterns; fundamental and market sentiment analysis should be included.
- The interpretation of trading volume varies greatly across different market phases
The significance of trading volume changes with the market environment:
In a bullish market, an increase in volume during price rises is a healthy phenomenon, indicating strong buying interest and potential for trend continuation.
However, in a bearish market, an increase in volume during price rises may merely be a rebound escape wave, often followed by a quick drop after short-term gains, necessitating caution to determine whether it is merely a false bullish rebound.
Furthermore, if "historical volume and price" occur at the end of a bullish phase, it may signal an overheated market and that major players are enticing more buyers.
Therefore, before using trading volume for judgment, one should first assess which trend phase the market is currently in before deciding on a trading strategy.
- Be aware of the possibility of volume manipulation (fake volume, wash trading, flash trading)
In today's market, an increasing number of algorithmic traders and high-frequency trading (HFT) participants may create large amounts of orders and cancellations, leading to phenomena such as "wash trading" or "fake volume."
This trading volume does not necessarily reflect genuine buying and selling demand but rather rapid probing of market depth or attempts to mislead counterparties.
Additionally, some major players or market manipulators may create a "spike in volume" illusion through small but repeated large orders, attracting retail traders to follow suit.
Thus, one should remain vigilant regarding changes in trading volume and observe whether they resonate reasonably with price movements. If necessary, use price tables, order dynamics, and intraday lifting behaviors for comprehensive judgment.
- The reference value of trading volume in small-cap and illiquid stocks is limited
In small-cap, low market value, or thinly traded stocks, trading volume can easily be dominated by a single large trader or specific brokerage.
The volume-price relationship in these stocks often exhibits phenomena such as low volume spikes, high volume drops, and unexpected surges, making it difficult for general investors to grasp the true trend.
It is advisable to prioritize analyzing trading volume in mid to large-cap stocks with good liquidity and high institutional participation to avoid being misled by information asymmetry.
- Trading volume must be analyzed in conjunction with price patterns and technical indicators
Relying solely on trading volume data can be misleading, especially if price performance and technical structure are overlooked.
The correct approach should be to "combine volume and price for judgment," for example:
- Whether a breakout above the neckline is accompanied by a long green candle with increased volume
- Whether a golden cross of moving averages is accompanied by a sustained increase in trading volume
- Whether a breakout failure at a resistance zone is accompanied by a stop-loss signal
It can also be combined with technical indicators such as VWAP to comprehensively confirm trend direction and turning points. By cross-verifying multiple indicators, the accuracy of analysis and the success rate of operations can be improved.
OANDA provides unique "open position data charts"
The globally renowned forex broker OANDA's open interest data can count and reveal the distribution of open positions in forex CFDs among OANDA's global clients.
Open interest represents the number of positions held after a trade, and this data can be used to observe OANDA clients' bullish and bearish views and position layouts.
This helps assess the market's bullish and bearish conditions and whether the price levels at which one places orders align with the thoughts of other OANDA traders.
OANDA open position data chart
What is cryptocurrency trading volume? What is its use in trading?
Additionally, this chart can be directly installed on the MT5 platform, allowing for trading while viewing the chart.
MT5 GBP/USD 1-hour chart
What is cryptocurrency trading volume? What is its use in trading?
How does OANDA's open position trading principle and application work?
Taking the OANDA global clients' gold open position data as an example, the green line represents the current price level (market price).
The right side shows the long open positions, while the left side shows the short open positions. The Y-axis represents price, and the X-axis displays the levels at which both bulls and bears have open positions.
What is cryptocurrency trading volume? What is its use in trading?
Data source: OANDA open position data chart
Based on the open positions of bulls and bears, they can also be divided into four quadrants, each with different trading principles and applications:
What is cryptocurrency trading volume? What is its use in trading?
Data source: OANDA open position data chart
First Quadrant
The first quadrant represents positions bought at high points.
In trading applications, since these positions were bought at prices above the market price, they are currently showing losses. If the market price continues to decline, it may trigger stop-loss selling pressure.
Conversely, if the market price rebounds, selling pressure from trapped positions will gradually be released according to the rebound's magnitude.
Thus, the more positions bought at high points, the stronger the subsequent selling pressure, which will be detrimental to price increases.
Second Quadrant
The second quadrant represents positions that are profiting from short selling.
In trading applications, since these positions were shorted at prices above the market price, they are currently showing profits. If the market price continues to decline, most short positions are willing to hold, providing support during the downward phase.
Conversely, if the market price rebounds, it may trigger buy orders from short positions taking profits, and the larger the rebound, the stronger the buy orders from short positions will be.
Third Quadrant
The third quadrant represents positions that are losing from short selling.
In trading applications, since these positions were shorted at prices below the market price, they are currently showing losses. If the market price reverses and declines, short positions may begin to release trapped selling pressure.
Conversely, if the market price continues to rise, short positions may trigger stop-loss selling pressure due to expanding losses.
Thus, the more positions losing from short selling, the stronger the pressure on bears, which is favorable for price increases.
Fourth Quadrant
The fourth quadrant represents positions bought at low points.
In trading applications, since these positions were bought at prices below the market price, they are currently showing profits. If the market price reverses and declines, it may trigger sell orders from long positions taking profits, making it easy to form a "long kill long" scenario.
Conversely, if the market price continues to rise, most long positions are willing to hold, providing support during the upward phase.
Common Questions
What is trading volume?
Trading volume is a quantifiable metric that refers to the number of a specific asset traded over a period in financial markets. Trading volume is a key indicator of market activity and liquidity, and it is typically displayed alongside price information.
What is the use of trading volume in trading?
Trading volume refers to the number of a specific asset traded over a period, so when overall market trading activity becomes active, trading volume will inevitably increase. An increase in trading volume also indicates strong "market momentum," with buyers willing to absorb the selling pressure from sellers, often brewing short-term rebound opportunities.
Conclusion
Trading volume is a very important indicator in cryptocurrency trading, playing a crucial role in judging price trends and investment decisions. If you want to become a qualified investor, you must pay attention to this indicator of trading volume.
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